Going for growth - IRR

Frans Cronjé says the ANC govt must change its trajectory, if it is not to lose its democratic mandate

Speech delivered by Frans Cronje at launches of the National Growth Strategy in Pretoria, Johannesburg, and Cape Town over the past week. 

The National Growth Strategy: A strategy for change in South Africa

The National Growth Strategy or NGS is an economic recovery plan that has been drafted by the policy team at the IRR. The plan seeks: (1) to improve capital inflows and foreign direct investment (FDI) into South Africa, so as to start raising the growth rate; (2) to build and maintain essential economic and social infrastructure to stimulate growth and provide a solid foundation for further entrepreneur-driven economic expansion; (3) to translate increased growth into increased employment; and (4) to help the disadvantaged climb the economic ladder to increased prosperity, while sustaining current social protection.

Section one: Capital flows and Foreign Direct Investment (FDI) (property rights, domestic competitiveness, entrepreneurs) 

To get the growth rate up, South Africa needs to push up the ratio of fixed investment to GDP from 20% to 30%. To achieve this, it will have to attract significant amounts of both foreign and domestic capital. To draw capital into the country, the government must ensure that property rights are properly protected.

It must also offer returns at rates comparable to those in other emerging markets. The growing threat to property rights is particularly evident in new laws and policies affecting agriculture, mining, oil, and gas; the private security industry; and the country’s intellectual property regime. The combined effect of these changes, as we know from our daily experience in consulting with investors, is to deter capital investment by both foreign and domestic investors.

The IRR has five specific proposals to strengthen property rights, all of which could be actioned within months:

1. Rework the Protection of Investment Act of 2015 to increase the protection on offer to foreign investors, in particular;

2. Enter into new bilateral investment treaties with major trading and investment partners, based on the SADC Protocol on Finance and Investment of 2006, which was ratified by South Africa in 2008;

3. Bring the Expropriation Bill into line with the Constitution under a revised bill similar to that put forward by the IRR;

4. Abandon proposed ceilings on farm sizes and a bill seeking to vest all non-urban land in the custodianship of the state;

5. Secure intellectual property rights, including copyright and patent rights, by scrapping the proposed intellectual property tribunal and related policy proposals.

Taking these steps will send a clear signal that the government is serious about policy reform and attracting the fixed investment needed to drive growth and jobs. This on its own may be sufficient to prevent the country being downgraded to junk status by international ratings agencies.

Increasing the returns on capital investment in South Africa requires a major uptick in the country’s international competitiveness.

The IRR’s proposals to improve domestic competitiveness are:

1. Expand and maintain essential infrastructure by entering into effective public-private partnerships, reforming the public service, and privatising most state-owned enterprises, as set out in Section 2;

2.  Adjust labour market policy by introducing various important reforms and allowing low-wage jobs at rates similar to those paid by the government under the Extended Public Works Programme (EPWP), as set out in Section 3;

3. Replace current Black Economic Empowerment (BEE) requirements with a new system of Economic Empowerment for the Disadvantaged or EED, as described in Section 4.

Increased capital investment must be accompanied by the growth of new small and medium enterprises (SMEs). Future job creation will generally take place, not through large corporations employing great numbers of people, but rather through a plethora of SMEs seeking to supply a vast range of goods and services to both domestic and external markets. Profit-seeking, risk-taking entrepreneurship is the key to faster growth and millions more jobs. It thus needs to be recognised and valued for its important contribution to the prosperity and well-being of all South Africans.

The government must resist the temptation to try to pick ‘winning sectors’ for special attention and economic incentives. It should rather focus on creating an environment in which any commercial enterprise can thrive – and leave it to the global forces already in play to shape the future of South Africa’s economy.

To increase growth and help generate a million jobs a year, we must encourage businesses of all shapes and sizes, from micro businesses run by individuals and families to multi-million rand corporations run by professional managers. Nothing must be excluded.

The IRR’s proposals for creating an enabling climate for entrepreneurship and business start-ups include:

1. Exempt small and micro businesses and new start-ups from all labour regulation;

2. Turn a general (and multi-year) blind eye to small entrepreneurs in the informal sector who currently fall foul of tax and other business regulations;

3. Introduce a permanent amnesty and fast-track compliance process for start-ups which want to become compliant with a new set of business-friendly regulations;

4. Outsource more and more of the functions of the state to the private sector through effective public-private partnerships that promote competition and improve efficiency (see Section 2).

Empirical data gathered by the Fraser Institute shows, for example, that between 1990 and 2010, the countries that were the ‘least free’ in the world experienced an average annual growth rate (in GDP per head) of around 1.6%.

By contrast, the ‘most free’ countries clocked up 3.6%, or more than double. Because of these very different growth performances, the least free countries recorded GDP per head in 2010 at $5 200, while the most free recorded almost $38 000 – more than seven times as much. Moreover, the average per capita income of the poorest 10% of people in the least free countries was $1 200, whereas in the most free countries it was nearly $12 000 – about ten times as much.

Section two: Infrastructure (private participation, build, own, operates [BOOs], build, own, transfers [BOTs])

If economic growth is to take off and reach 7% of GDP a year, available infrastructure will have to be greatly expanded, while existing infrastructure will have to be far better managed and maintained. The government’s role should be to reform regulations and contract with private sector providers to do the work. Though privatisation will help to bring in some of the revenue needed to fund new infrastructure, this is unlikely to be enough – especially at the start of the turnaround process.

South Africa must thus learn from the experience of the International Finance Corporation (IFC), which forms part of the World Bank and has helped to implement many successful private-public partnerships elsewhere in Africa. Such partnerships have often been used to deliver new infrastructure, or to manage existing infrastructure, and so enhance its efficiency and reliability while reducing operating costs.

Our recommendations are that various models can be used, including:

1. The build-own-operate (BOO) model, in which a private provider builds new infrastructure (such as a water desalination plant) and operates it, in return for user fees which a competitive bid process and private sector efficiencies help to keep reasonably low;

2. The build-own-transfer (BOT) model, in which the private sector takes on the construction task, so helping to avoid delays and cost overruns, and then transfers the new plant, railway line, port upgrade, or other infrastructure to the state at an agreed price;

3. The ‘affermage’ or lease agreement, in which the public sector retains ownership of the relevant infrastructure, but transfers responsibility for day-to-day operations to the private sector in return for agreed fees payable against stipulated performance criteria;

4. A more limited management contract, often used in small towns in Africa, where responsibility for operations, billing, and collections is transferred to private companies, while the costs of service are kept affordable through public funding for capital development.

As experience in Africa shows, some of the larger public-private partnerships on the continent have relied not only on local firms, but also on big-name multinational corporations. Some have also succeeded in raising significant funding (covering up to 85% of costs) from external financiers such as the World Bank, the African Development Bank, and other major financial institutions.

Section three: Labour market absorption (strike ballots, bargaining councils, wages, hire/fire)

It is critical that investment flows/start-ups translate into mass employment. The joblessness rate cannot be meaningfully reduced without major reforms to labour regulation. The government itself acknowledges that entry-level wages are generally so high that they lock the unskilled and inexperienced out of jobs. Rules which push up labour costs – including the extension of bargaining council agreements to non-parties and the sectoral wage determinations made by the labour minister in areas with little union presence (farm and domestic labour, for instance) – must be scrapped. Proposals to introduce a national minimum wage must be abandoned. Instead, private employers should be allowed to take a leaf out of the government’s book.

Under its Expanded Public Works Programme (EPWP), the government has provided millions of people with short-term ‘work opportunities’ for which it pays a stipend of some R80 a day. This is far below the minimum wages required under sectoral determinations and the like. The government provides these work opportunities at these low wages because it hopes they will pave the way to better jobs. Often, however, they do not. By contrast, if people were allowed to work for the same low wages in the private sector, they would generally receive better training, notch up more experience, and have better prospects of moving into higher paying jobs over time.

Greater flexibility in the hiring and firing process is essential, as business needs to be able to adjust to peaks and valleys in demand. Employers will thus hire freely only if they can dismiss freely. The presumption that dismissals are unfair unless the employer can prove otherwise should be removed. Instead, employers should be free to dismiss workers under the notice periods agreed on in their employment contracts.

Our proposals are to amend the Labour Relations Act of 1995 and the Basic Conditions of Employment Act of 1997 by:

1. Introducing secret pre-strike ballots (along with further secret ballots during prolonged strikes to test continued commitment to staying out);

2. Holding unions accountable for intimidation and violence during strikes;

3. Scrapping the extension of bargaining council agreements to non-parties often unable to afford them;

4. Putting an end to sectoral or other minimum wages;

5. Allowing private sector employers to pay wages to unskilled workers at rates similar to those under the EPWP;

6. Allowing employers to dismiss or retrench under agreed notice periods in contracts of employment.

Section four: economic participation and social protection (Economic Empowerment for the Disdvantaged [EED], vouchers, welfare)

South Africa’s Black Economic Empowerment (BEE) and employment equity policies are by far the most ambitious and far-reaching affirmative action programmes in the world. Partly for this reason, many misperceptions have grown up around their effects. Some people criticise them for harming the economic prospects of whites, but there is little evidence of this. At the same time, most people assume that these policies are effective in helping the poor and that they enjoy broad popular support.

These assumptions are no less flawed, as a recent IRR opinion survey showed. According to this survey, employment equity and BEE help only around 15% of black South Africans, while bypassing the remaining 85%. In addition, the great majority want an emphasis on merit and efficiency, rather than racial identity. They also want whites and blacks to work together in expanding opportunities for all. These survey outcomes show that there is very little political risk in reforming the current rules.

In private, the great majority of the IRR’s business subscribers say that BEE deters their investment in South Africa and hampers business operation. At the same time, many businesses would prefer to remain in the country and to play a genuine and constructive role in expanding opportunities for the disadvantaged. The IRR has thus won considerable support, behind the scenes, for its alternative policy of ‘EED’ or ‘Economic Empowerment for the Disadvantaged’.

The IRR thus proposes a paradigm shift to a system of empowerment which no longer bypasses the poor, but takes effective steps to empower the disadvantaged by rewarding the fixed investment, job creation, tax payments, and export contributions of businesses invested in South Africa; in other words, the building blocks of real empowerment. The EED alternative therefore offers a win-win solution that breaks the current dichotomy between the needs of investors and the government’s transformation goals. The key policy changes required are to:

1. Replace current BEE and employment equity rules with EED;

2. Rework relevant scorecards to prioritise fixed investment, job retention and creation, along with the other contributions earlier identified.

Even when the economy starts turning around and millions more jobs are created, the state will still play an important role in improving the living standards of the disadvantaged. It may also have to do this for two or three decades to come. Essentially, it needs to ensure the effective provision of sound education, healthcare, and housing. The state must also continue to provide monthly cash social grants for children, pensioners, and the disabled.

However, major reforms are needed to make social protection more effective. In essence, the government must develop appropriate policies, set targets, and raise the necessary revenue, while the private sector, communities, and individuals must take charge of delivery and implementation. This can be achieved through the use of vouchers and the outsourcing of service provision.

The IRR has done extensive research on education vouchers, but the underlying idea can easily be extended to healthcare and housing. In education, the key concept is that government must continue to fund education out of tax revenues, but needs no longer to provide it. Instead, it should allow communities, non-governmental organisations, or private investors to take charge of schools. Most of the education budget would then be divided among pupils and distributed to their parents in the form of education vouchers, which would be used solely to purchase schooling.

Parents will then be empowered to enroll their children at any school of their choice. As fee-paying consumers, parents will also have the power to hold school principals and teachers to account. Since schools will have to compete for the custom of parents, this will give them a powerful incentive to upgrade their teaching and improve their overall performance. The vouchers, in short, will generate a market for education, which will bring about a rapid improvement in the quality of education. As a variation on the basic idea, the state could also contract with private providers to run its schools, so turning them into ‘contract schools’ of a kind found in the US and the UK – and most recently in Liberia.

A similar idea in healthcare would see the state providing vouchers to poor households, which could use them to purchase medical cover, mainly in the form of low-cost medical schemes.

Much the same idea can also be applied to speed up the provision of housing. To improve efficiency and empower the poor, much of the housing budget should thus be used to fund housing vouchers for poor households. These vouchers could be used to access mortgage financing and so help people build their own homes. This would reduce government inefficiency and allow people to meet their housing needs without having to wait endlessly on the state to deliver.

Our proposals on social protection are therefore to:

1. Introduce education, healthcare, and housing vouchers to expand skills and social protection;

2. Maintain current social grants, which will become more affordable as growth rates and tax revenues rise and debt levels decline.

The next step: political and government action

It is not for the IRR to dictate to the government or political parties what to do. Too many groups overstep that mark and think they should decide on policy or try to push for changes through the courts. Think-tanks such as the IRR can help to act as catalysts for change, but only the government has a mandate to take policy decisions on behalf of large numbers of people. Our role is thus to develop simple, workable, policy alternatives and show the benefits of these.

At the same time, if South Africa continues on its current economic trajectory, the ruling party could lose power before the end of the decade. As people become poorer and lose hope, they also lose their earlier confidence in the ANC, as various opinion surveys now show. The ruling party would thus be wise to acknowledge that many of its current policies, including its transformation ones, are at odds with the urgent need for investment, growth, and jobs.

South Africa is now in considerable economic trouble. Looming ratings downgrades to sub-investment levels will worsen our economic position and make it much more difficult to stage a recovery after the 2019 general election.

At the same time, the government is still capable of reform. In the period from 1994 to 2007, it did much to raise the growth rate and lower debt levels, while simultaneously expanding social protection and improving living standards. The National Growth Strategy is thus within the power of the government to start implementing very soon – and then to drive forward to highly successful outcomes.

Many other growth plans have, of course, been drafted for and by the government. Often they are too vague, complex, and impractical. Sometimes their time frames are so long that they seem irrelevant. Others seek instant fixes and thus rely on gimmicks such as ‘wage subsidies’ and ‘industrial development zones’, which ignore the structural reasons for poor economic performance. Yet others have focused on ‘low hanging fruit’ to the detriment of needed structural reforms.

The National Growth Strategy avoids these pitfalls. If the bulk of the National Growth Strategy is adopted and implemented, this will stave off looming downgrades to junk status. The strategy will also have a measurable impact on investment, growth, employment, and income levels, within 12 months. At the same time, it will provide the foundation for sustainable growth rates of 7% of GDP within a decade. This will allow South Africa to combat unemployment, poverty, and inequality; live up to its great potential; and emerge as a prosperous middle-income economy by the 2030s.

Many in the government may be ideologically reluctant to embrace these reforms. However, much of what we propose is drawn from the successes achieved by Lee Kuan Yew in Singapore in the 1950s and 1960s, which in turn helped inspire the reforms driven by Deng Xiaping in China in the 1970s and 1980s. Both these men were nationalist leaders who dramatically changed the fortunes of their countries and turned them into influential global economic powerhouses. Their extraordinary successes show how much can be achieved – and should put paid to any notion that South Africa cannot also become rich and influential.

Frans Cronje heads the IRR, a think tank that promotes political and economic freedom. The IRR policy team drafted the NGS in the hopes of securing an economic turnaround in South Africa.

The full NGS document can be read here